World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, June 11, 2010

Let’s get this out in the air - are people just high? Seriously, China exports up 50%? Not only what are they smoking, but what are the people who believe this crap smoking? And if you are just plain old gullible enough to believe that it’s true, why would anyone consider that type of move a good thing? I’ll come back to that, first let’s deal with the high frequency computerized debt addicts over here who were buying stocks yesterday.

Equities are down hard from their highs this morning on the Retail Sales report. Bonds are up, the dollar is up, Euro down, oil down sharply, and gold up. Sound familiar?

Well guess what… yesterday the computers all got on the same side of the trade again and produced a 97.6% volume up day on the NYSE. For those keeping score, it’s now 90%+ down days 8, and up days 5 since mid-April! Lucky 13. Will we get 14 as the computers all get on the same side today?

Folks, you’ve been warned and I know you’re listening because this is proof positive that not only are you out of the market, but all your friends and family are too. This “market” is nothing but very few players all chasing one another with computers, there are no “investors” left. This is an extremely dangerous thing, and it is far worse than it has ever been – EVER. Everyone with two or more neurons left that can still develop a spark are long gone. Those who get on television and talk up this “market” either don’t meet the requirements of the previous sentence or they are trying to steal your money from you, plain and simple.

The chemicals pouring into the Gulf must be already leaching into the chowder heads who still believe in the fairy tale of growing retail sales. They have first failed to understand this report and its built-in survivor bias, and they have failed to allow for the fact that any rebound in sales over the past year was built upon a rush of debt-backed “stimulus.”

So the “experts” expecting .4% growth receive a report that says retail sales fell 1.2% in May. Remember, this is way exaggerated on the up side because it only measures sales at stores that are open and does not account for the lack of sales at stores that have closed. Would that be hard to account for? No. How about simply totaling sales? Is that too difficult, addition? And even then you need to realize that you are adding up DOLLARS, not products. This type of self-deception has got to stop.

Here’s Econoday’s attempt to sooth you:

HighlightsIt looks like the consumer paused the spending spree in May. But on average, sales have been healthy over the past few months. Overall retail sales in May fell 1.2 percent after gaining 0.6 percent in April and jumping 2.1 percent in March. May came in far lower than analysts' expectations for a 0.4 percent increase. Autos were only part of the decline as sales ex autos decreased 1.1 percent after gaining 0.6 percent in April. Sales excluding autos and gasoline posted a 0.8 percent drop, following a 0.6 percent boost in April.

It this latter measure, weakness was mainly in building materials & garden supplies. Excluding autos, building materials, and gasoline, sales edged up 0.1 percent in May after decreasing 0.2 percent in April.

The bottom line still is that consumer spending has been healthy on average over the last several months. Some offset should not be a surprise after a strong burst of activity. But the 1.7 percent decline in auto sales in the retail sales report actually somewhat surprising given that unit new motor vehicle sales were up 3.8 percent for the month. But weakness could have been in used cars, parts, or in price.

The drop in sales for overall sales in May was centered in a 9.3 percent plunge in building materials. This was the largest fall for this component since the start of the series over 18 years ago. However, this component jumped 8.1 percent in March and 8.4 percent in April. So, the decline in May is not terrible in context.

Other notable weakness in May was in gasoline, down 3.3 percent, and in clothing, down 1.3 percent. The drop in gasoline sales almost certainly was price related and the same may be true for clothing.

Overall retail sales on a year-ago basis in May came in at 6.9 percent and compared to 9.0 percent the month before. Excluding motor vehicles, the year-on-year rate slipped to 6.1 percent from 7.8 percent in April.

Today's numbers clearly were disappointing and equity futures declined on the news-and Treasury yields slipped. But looking ahead, the PCEs component in the personal income report likely will not be as bad with it based on better auto numbers. And it should be much better in real terms.

Ahh, are they kidding? They point out the trend right there, 2.1%, .6%, -1.2%... ahh what comes next in that series?

Oh yeah, everything will chug right along fine with all the stimulus removed and the world still saturated in debt. Did you catch the largest drop EVER for building materials? Down 9.3% in one month?? Weren’t Cramer and fellow single neuron pumpers just shouting to buy Home Depot and Lowes? Keep smoking that stuff, it must be good.

Citizen Sentiment and Inventories are reported this morning at 10 Eastern.

Getting back to China, first of all let’s realize that in comparison to the size of the economy of the United States and Europe, it is not even the tail on the dog. Due to this size disparity, those who believe/d that China would lead the world to greatness have not been effectively utilizing their sole remaining neuron. And to believe the reports of a 50% move in exports in a one year time frame is again, simply gullible. Here’s an example of what the gullible are parroting:

A rumor that China’s exports rose 50% compared to last May drove China’s markets up over 2% at the close of trading. It turns out that the numbers were correct. According to Reuters, most experts expected the increase to be closer to 30%.

The news shows the growing strength of the US economy. China exports to the EU are hardly likely to be rising quickly because of region’s lagging GDP growth and high unemployment. China’s rising exports will likely increase the debate over the value of the yuan, particularly if US government reports do not show a sharp increase in American exports. China, the Administration will argue again, does as well as its does in selling its manufactured goods around the world because it has a currency edge along with low labor costs.

So, the 50% growth in China exports are due to strength in the U.S.? LOL, are they kidding? Is there really anyone on this planet who believes that? Do they realize that if it were true, that means exports are more than doubling every two years? Is that rate sustainable? And I haven’t even asked if it’s based on currency distortions or on flat out lies. I place my bets on flat out lies.

Not that I really trust this either, and keep in mind that it’s measured in dollars, but let’s look at a chart of U.S. Imports from China, updated through April of this year:

Here’s a 5 year zoomed in chart:

You can see that it peaked out at $34 billion crashed to $19 billion, and has since rebounded to $26 billion. Yes, those are some wild swings, but below is the same chart expressed in year over year percent change – it shows 20% in the past year:

Umm, 20% does NOT equal 50%. And we’re supposedly the strength of the report? If that’s so, then it should be up more like 100%! Here’s the math from these charts – Our imports from China are DOWN 23.5% from peak. They are up 36.8% from the low point. What they are not is up anywhere near 50% in any single reporting period. Frankly, the swings that are there are scary enough. So, if China is exporting at the claimed pace, where are they exporting to? Yet another confidence destroying lie.

Below is a 15 minute chart showing the confines of the action over the past few days.

We are now up against the downtrend line of this decline. Breaking through the trendline may mean that a higher level correction is going to transpire. Keep an eye on the Dollar, the Euro, and on the VIX. The VIX has a support shelf at about 30, a move beneath that level may signal more upside, as would a break of the downtrend lines.

Yesterday’s jump was not a natural or generic move, and once again it came on lower volume and without any change in any fundamental. It looks like a frantic fight between intervention and short covering on one side doing battle against the reality of gravity on the other. Very dangerous in both directions. If we break out after yesterday’s HFT romp, then the HFTs will be forced to pile on again and all the shorts will bail. That may lead us into a higher bounce and the formation of that right shoulder, we’ll see, but if you are not a speculator, this type of “investment” should not be for you.

Hey, all I can say is hang on. The stuff that’s happening in the Gulf by our government and by BP is absurd and also very dangerous. People are doing desperate things - they are manipulating data, currencies, and markets. They are lying. History will look upon this time as a great example of how to destroy confidence. Hey, 50% increase in exports… 451,000 jobs created last month… it’s only leaking 5,000 barrels a day… subprime housing is contained… all I can say is that someone is smoking something good.

As you view this presentation on Empathy, you may have alarm bells ringing in the back of your mind… is he selling us the central banker’s “one world?” No, I don’t think so… please view the clip and then let’s discuss:

Sure, if I were a central banking debt pusher wanting to control and profit from the world with my debt, I’d want a nice sounding story like Rifkin is painting. But remove the central banker debt pushing fear that we’ve all grown to despise, and perhaps he is describing the way the world really works? And while it sounds like he’s talking about psychological principles, I think he’s touching upon a very fundamental building block of any economy. We’re talking about the building blocks that come before the rule of law.

Remember how I wrote about The Foundation of Economics? In that article I showed how economic activity begins with the rule of law at the foundation and builds up into wealth and prosperity.

Well now we need to add Empathy and Communications at the base which supports and leads to the creation of the rule of law. And as a review, no, natural and human resources are not at the base of the economic pyramid! Proof? Take a look at Hong Kong or Singapore, both poor in natural resources. Or look at the wealth of the Dominican Republic versus the abject poverty of Haiti – both with similar natural and human resources, so what is the difference?

Well, now it’s time to go a little deeper. First of all we need to agree that any economy must fit and work within nature. If, for example, the math of debt backed money doesn’t work, then it doesn’t work within nature and therefore it won’t last. The rule of law can be anything we want it to be, but if it fails to fit into the physical world, then it will fail. So envision that the economic pyramid is surrounded by, and works with nature (hint – never ending growth will eventually fail).

Thus the rule of law is EVOLVING over time to better fit the rules of nature. Obviously it has a long way to go and I have a lot more to discuss on this but will save it for now. Suffice it to say that as political systems and economies rise and fall, that the structure of these systems has been leading us slowly in a certain direction… Are wealth and prosperity really the top of the economic pyramid? Is there no higher PURPOSE?

I say that ultimately the “invisible hand” is not just Adam’s Smith’s self-interest. Rather, it is our natural instinct to survive. Thus the invisible hand is caught between a person’s own self-interest and mankind’s larger self-interest. Is having a child, for example, in one’s own self-interest, or do we have an innate drive to perpetuate the species into the future? The natural mission thus becomes the survival of the species, and that is what truly belongs at the top of the economic pyramid. Again, I have much more I can say about that, but let’s go back down to the foundation of the pyramid where we find Jeremy Rifkin.

How are empathy and economics related? Well, if I have some capital or labor I can accomplish a little. If you and I decide to partner our capital and labor we have a little more, and can accomplish some things that I, as an individual, could not accomplish alone… and on up the chain into corporations and into governments we go. But we can’t work together if we don’t have two key ingredients – empathy and communications! Rifkin gives some great examples of how empathy and communications have come together throughout history to advance civilization.

Empathy and communications are at the heart of capital formation! Could we have placed man on the moon without them? Is placing man on the moon beneficial for our economy or for the survival of our species? How much capital formation and concentration is required to accomplish that feat? Certainly no one individual can do it alone. In fact, no one corporation can do it alone and thus in practice it required the combination of government and corporations. Does it advance our economy towards the top of the pyramid? Yes, I think it does – sans debt backed money it would do so much more efficiently (caveats galore – see Freedom’s Vision)!

Had an urge to climb a mountain lately? Jump on your bike and just travel? Why do people explore and work to extend their range? Could it be a part of the survival instinct? What does nature say about species that fail to evolve or to expand their territory? Now, don’t get me wrong, expanding territory to the exclusion of nature is suicidal - that’s what we have to overcome with our intellect. The battle between our instincts and our intellect will determine how far into the future our species goes.

Would we have explored "the new world" without this drive to explore? Did that require capital formation and a new rule of law (corporate limited liability) to pull it off? Yes it did. Would the framework of our Constitution been invented had we not? Would you be alive today and living in America?

No, we don’t spend nearly enough on the sciences. And the “science” of economics is probably dead last… yet it’s the very thing that must be understood if we are to progress. It’s a cycle that works WITH nature and feeds up the pyramid. Not the debt money narcissistic pyramid, but the economic foundation pyramid. Yes, we are going to have setbacks. We’re facing a large one in the near term, but don’t give up or give in. It’s the struggle that gives us the empathy that will allow us to take the next giant step forward for mankind.

Equity futures are higher this morning as they have overall moved sideways for the past week remaining above 1,040 on the SPX but below 1,100. Both the dollar and bonds are down, oil is up, gold is down. The Euro is higher, but still beneath its primary down channel line, it is probably getting close to resistance and relatively speaking the dollar is holding up strongly, just beneath that overhead resistance.

Yesterday’s session was quite volatile as the DOW fell more than 200 points from its high. The internals were more evenly split with 51% of the NYSE volume on the downside. There were 45 new NYSE lows, and 35 new highs.

Jobless claims rose to 456,000 from 453,000 the week prior. Consensus was expecting a drop to 448k. Here’s Econoday:

HighlightsInitial jobless claims continue to disappoint but only mildly, at 456,000 vs. expectations for 448,000 and vs. 459,000 in the prior week which was revised 6,000 higher. The four-week average rose for the fourth straight week to its highest level in three months, up 2,500 to 463,000.

But there is improvement on the continuing claims side, hinting at new hiring. Continuing claims fell a very steep 255,000 in the May 29 week to 4.462 million and the lowest level since late 2008.

Disappointment over initial claims is offset in part by the improvement on the continuing side. But until initial claims begin to improve, the outlook for payroll growth remains uncertain.

The DOL reports, “States reported 4,995,133 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending May 22, a decrease of 10,588 from the prior week. There were 2,256,591 claimants in the comparable week in 2009.”

That’s still 2.74 million people on Emergency Unemployment Compensation.

The Trade Balance for April came in at -$40.3 Billion, this is down from March’s -$40.4 Billion. Exports slipped $.7 B, while Imports also fell but not as much, down $.4 B. Overall lower activity with exports falling more than imports could be partially the response of the rising dollar. Below is Econoday’s summary:

HighlightsWeaker exports led to a widening of the trade deficit in April. The overall trade gap widened to $40.3 billion from $40.0 billion in March. The April shortfall came in a little smaller than the market forecast for a $41.0 billion deficit. For the latest month, exports slipped 0.7 percent while imports decreased 0.4 percent.

The petroleum goods gap, however, narrowed to $24.0 billion from $24.5 billion in March. The nonpetroleum deficit widened to $27.9 billion in April from $26.7 billion the month before.

Softness in goods imports was led by a $1.7 billion fall in consumer goods-indicating that businesses are more cautious about consumer demand in coming months. Auto imports dipped $0.2 billion. However, the bright spot in imports is a $1.4 billion jump in capital goods excluding autos. Businesses appear to see demand strong enough to expand or upgrade capacity.

Today's report raises the issue of whether sovereign debt problems in Europe are damping overall demand. Due to the drop in exports, equities should not like today's numbers despite the deficit being smaller than expected.

$40 billion a month is still down a third from 2007 levels, and almost seems quaint now that weekly debt issuance is 3 times that amount.

What was that big jump in exports from China I was reading about? Where were they exporting to? There needs to be a better way to track trade – measuring in currency is flawed. Tracking the shipping indices has been a better way to keep an eye on it, below is the current Baltic Dry Index, you can see that it collapsed 90% and has rebounded in a manner similar to most parabolic collapses. The latest trend is another turn down:

Here’s a chart showing the BDI over the past year, it has yet to break its most recent uptrend:

Stocks may have finished wave 2 of 3 down yesterday, or we may have one more c leg up as yesterday’s down stroke appeared to be a middle movement for wave b. We’ll know if we get over yesterday’s high or not, either way we are likely getting very close to wave 3 of 3 down. The movements are shortly spaced, so don’t be surprised by more intraday reversals. Support and resistance remain the same. Below is a 30 day, 30 minute chart of the SPX just for some perspective:

A few days ago a longer term sell signal was given when the 20 day moving average crossed under the 200 day moving average. This last produced a sell signal in late 2007. You can see that we received a buy signal in June of 2009. This signal has very few false alarms, especially if you give it until the averages are separated by 1%, which they are right now.

Hey, if you’re being smart and conservative you will have the majority of your assets well protected so that you can take advantage of what’s coming. While you may not like the dollar, for right now a majority cash position is giving me the opportunity to think clearly and to have some peace of mind…

Wednesday, June 9, 2010

I recently finished the book, “In Search of Time” by Dan Falk. This was a very good book, one that really gets you thinking about the way that nature, and time, work. It touches on how man’s perception of time has changed radically throughout history, and then takes you into the sciences and time’s role in them – definitely recommend it.

This RSA Animate (I really like that as a presentation method) will also get you thinking about your perspective of time and its relationship to how you work and think. Do these time tenses influence nations? Do they underlie work ethics and productivity? Will societies that are set up to encourage work ethics and a faster pace of life flourish over those that don’t? Is this instinctual, a part of the race for survival? Is being bored with “analog” really a bad thing, or is it a good thing? Definitely should get you thinking. Perhaps as we use technology to swing away from personal relationships, that the pendulum will swing back and we’ll find a balance between the technology and the social graces? It’s an undeniable trend, he says as he types to his friends in the blogosphere!

Damn, this site doesn’t download fast enough! Can you change the background color to white? (ht RRH)

Equity futures are higher this morning after bouncing off 1,040 support once again yesterday. The dollar is down, Euro is up, bonds are down, oil is up, and gold is down. In other words, just the opposite of the relationship of the recent decline.

While the SPX 1,040 support area is the neckline of that large H&S pattern that’s trying to trace itself out, the resistance for the dollar is also strong. There is also support there in equities from the 200 month moving average. So, how high do we bounce? There are resistance levels all over the place, with the first one at 1,070, then 1,080, 1,100, and the 200 dma is at 1,110. Below is a 60 minute chart of the SPX:

If you look at the waves on the surface, it appears that we just finished wave 5 down – but that’s not what is happening because of the EW rules. First of all, what appears to be wave 3 is shorter than wave 1. However, the rule states, "Out of the three impulse waves - 1, 3 and 5 - wave 3 can never be the shortest." So, while wave 3 is shorter than 1, if we just finished wave 5 then it was the shortest. But it's another rule that eliminates that count, "Wave 4 may never end in the price territory of wave 1." So, we are working on the premise that wave 3 is still underway and that this bounce is a correction within wave 3.

This may be just a short bounce, and that is what I’m suspecting. McHugh believes this final bounce is a part of wave 2 of 3 and that 3 of 3 will follow, that means a large and very sharp decline will follow. I put the maximum range for this bounce just above 1,140 which is where the 50 dma will meet prices if we continue higher for any length of time. There are alternate counts that would produce a shallow bounce here and I am favoring those.

The number of new lows rose to 131 yesterday, that was a divergence against rising prices. There were 22 new highs – if both numbers go above 75 then we will look at the other indicators to see if we get a Hindenburg or not. The NDX also failed to make it into positive territory with the DOW up 115 points! That’s something new, and again is an unhealthy split in the market.

Could the IMF be speaking the truth when they say the following? I think so, and again that’s something new!

June 9 (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”

That’s it in a nutshell. The world is debt saturated and the will/ability to crank out even more debt is waning sharply. Welcome to wave C, the wave that actually produces change or allows enough debt to be cleared that another economic cycle can occur.

The shameful/worthless MBA Purchase Applications Index came in as a disaster this morning. While they only report percentage moves, we do know that Purchase Application fell to new record lows over the past few weeks following the end of homebuyer tax credits. Today the MBA reported that Purchase Applications fell another 5.7%, and that Refinancings fell 14.3% moving the entire Index down 12.2% - for the WEEK. Here’s Econoday:

HighlightsPurchase applications continue to fall following April's end to second-round stimulus, down 5.7 percent in the June 4 week for a 35 percent decline from just four weeks ago. Refinance applications, after shooting higher in recent weeks on low mortgage rates, eased back in the latest week by 14.3 percent. The report warns that many homeowners who have yet to refinance may not be able to so if they remain underwater on their mortgages, have uncertain job situations, or have damaged credit. Mortgage rates were little changed in the week with 30-year loans averaging 4.81 percent.

I think we’re going to see some very weak sales reports over the coming months, and I think the high end housing industry is in big trouble with the giant wave of Option-ARM resets now in progress and growing stronger.

For those who didn’t catch my post in the market thread yesterday, Calculated Risk ran a piece with his analysis of the effect of Census workers on upcoming employment reports. He calculates that they will be laying off about 200,000 temporary workers that were just hired this month! So, if the net hiring is not positive and swings that large to the negative side, you can look for a negative employment report ahead. Also, if you look historically at the Birth/Death model adjustments, they peak in May and then decrease, so it should not be as large in the next report – if they can contain themselves that is.

So, expect some “we’re saved” talk over the next few days (hours), then for reality to set in again. In fact I just read a report about a supposed 5% jump of lending in China – we’re saved! LOL, that’s pretty much what the article said, amazing.

Oh, and for the gold bugs in all of us, gold did reach a new intraday high yesterday before pulling back. That triggered a new bullish target on the P&F chart of $1,310.

The CBOE Put/Call ratio did reach a level that can correspond to short term bottoms yesterday, closing at 1.16. Below is a chart showing the daily moves against the SPX in the background:

If you’re playing the bounce I hope you’re nimble. I’ll be hitching a ride on 3 of 3…

This raises new questions about the possibility of inferior casing, about the amount of oil actually coming out of the ground, and about the likelihood of relief wells actually working and how long they will take to work.

Even if they do work, what will be the damage to the coastline, the food chain, and how far around the globe will it travel if it continues to spew for months, or if the relief wells fail, even years?

But Matt Simmons, a well respected and lifelong oil man, has more to say on the subject, listen to this discussion with Dylan Ratigan:

I contend that humans are vastly miscalculating RISK. We have miscalculate the financial risk and allowed private central bankers to create a money system that requires never ending growth – a mathematical impossibility. We poke hole after hole into the ground (2,500 wells in progress now) in more and more difficult places and do not require corporations to use redundant fail safe systems – like we do for airliners. We should have seen these possibilities and required nothing but the highest levels of safety. Just as we should require a money system that is not guaranteed to fail over time, one that only works to enrich the very few people who control money’s production.

Now we have oil gushing into the Gulf at extremely high rates and we fiddle fart around. If that casing is shattered and oil is leaking up through the seabed floor, this is an entirely different ballgame than the one we have been spooned.

If we even mention the word “nuclear” people freak out. Again, this is miscalculating the risk. The greater risk is poisoning the entire food chain and watching oil and chemicals travel the oceans of the world. If it turns out that oil is seeping up through the ocean floor, an underground explosion may be the only option – and it may be an option that we are fools not to use sooner than later. Using it AFTER the ocean is poisoned is simply moronic, no other word for it.

Concerns over radiation leaking are vastly over perceived. Mankind has set off HUNDREDS of underground explosions and never produced anything even remotely approaching the damage being done right NOW by this one oil well. We need to be examining the nuclear option and evaluating the soil between the well head and the oil reservoir. Call me nuts if you want, but we should have been prepping for this from day one. We should be drilling a parallel shaft to the well NOW in preparation.

Mankind invented a very dangerous thing in nuclear weapons. We now have the opportunity to put them to use on behalf of mankind, yet we refuse to help ourselves with our own technology. The greater RISK may very well be in letting the oil run. I say that collapsing the well and sealing the fissures surrounding it now may be the lower risk thing to do – at a minimum we should be discussing, evaluating, and preparing for it in light of the facts and not our emotions. This means that we need to know the full extent of what’s going on, and we need that transparency now.

Equity futures are very near flat after being both up and down overnight. The Dollar is moving sideways just below overhead resistance that is located at 88.8. If it breaks above that then the Euro is also likely moving lower out of another but smaller sideways triangle. Those triangles in the currencies are being reflected in equities. Below is a 5 minute chart of the DOW on the left and S&P on the right:

Those are descending wedges. Under normal circumstances, those wedges would be expected to be terminating patterns and that prices would break up. However, if we are in wave 3, and the last two day’s action sure looks like it, then prices may just slide right out the end of those wedges and spill downwards like water obeying the call of gravity. This is what happened to these patterns in ’08 – so I think this is an important point as they are forming just above key support in the 1,040 SPX area. Break the currency triangles and throw the dollar higher, then we spill out the bottom of these. Currencies hold and we bounce.

Bonds are also moving sideways. Oil is up a little this morning, while gold set another all-time new high at $1,253.90, which follows yesterday’s new all-time closing high.

Yesterday’s close took the Transports, the NDX, and the RUT to a close beneath their respective 200 day moving averages. Both the Transports and the Industrials made new lows together, this is confirmation of the bearish trend. Both the Industrials and the SPX closed below the closing lows of last February.

This places the S&P 500 in the same place we were NINE months ago, last September! If that weren’t bad enough, it also places prices where they were in January – get this – 1998! That was more than 12 years ago, and I want to be clear, stocks overall did NOT perform that well! No, always keep in mind that these are indices and they suffer from substitution bias – buying and holding individual stocks will net you poorer performance overall.

Notice on that chart above that we are sitting right on the 200 MONTH moving average. Note, too, that the RSI and monthly Stochastic are on monthly sell signals just coming down out of overbought.

But don’t worry if you happen to believe that stocks always go up and thus you buy and hold “for the long run.” No, Bernanke, who has done such a wonderful job of forecasting the future notes that recovery “won’t feel terrific.” Gee, that’s nice. I guess he means unless you are a central banker.

He warned the unemployment rate will remain high "for a while," explaining, "that means that a lot of people are going to be under financial stress."

So, with all that stress, where are the bailout trillions for the people? I mean when the financial system was “under stress” we threw trillions at it, but when the people are under stress what action do we take???

Oh, Ben has a plan - “the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said. That’s nice.

According to reports, Bernanke talked about the need for U.S. leaders to take control of the nation's deficits over the medium term, some three to six years from now, in a way "that will allow us to bring our fiscal house in order over a long period of time."

But when asked if the nation has such a plan, or if he's seen one, Bernanke said: "No. Not yet. I don't."

Hmmm… Guess he doesn’t want to talk about Freedom’s Vision because that would mean he’s out of a job! It would also end the central banker debt-backed money box paradigm which is key to finding any true solution.

There are no worthy economic reports today, yesterday’s Consumer Credit report stunk up the joint again. First, the March number that was reported as +$2 billion was revised downward to show a $5.4 billion contraction, gee, nearly 300% off in the totally opposite direction of what was originally reported. Nice.

HighlightsConsumer credit rose $1.0 billion in April in a gain far offset by a $7.4 billion downward revision to March which now shows a $5.4 billion contraction. Non-revolving credit, reflecting strong car sales, jumped $9.4 billion in April but was offset by a nearly as large of a fall in revolving credit. The drop in revolving credit reflects the month's slowing in ex-auto retail sales.

Vehicle unit sales firmed further in May pointing to a gain for the non-revolving side. But early retail indications for May are flat, pointing to offsetting weakness on the revolving side. Consumer spending has been an important factor for first-half strength, reflected to a degree in this report where a record contraction came to an end in January. But improvement in this series has been choppy and will no doubt turn on progress in the labor market, which for May was very soft.

This is a very weak Consumer Credit report, it shows that people are not out spending wildly with their credit cards.

Yesterday John Williams at Shadowstats.com revised his calculations for M3, the largest measurement of money supply, and it came in at negative 5.9%! He says that it is a “Post-World War II Record drop” that “signals intensifying business contraction.” He goes on to say that a “renewed recession will set [the] stage for U.S. Solvency Crisis and Severe Inflation Threat.”

John has been in the hyperinflation camp for quite some time, calling it “imminent” on several occasions. Yet, that’s just not what we’re seeing, we are seeing contracting money supply, contracting credit, and we’re seeing contraction in the shadow banking world of derivatives. Will this bring about hyperinflation? I do believe that their reaction to a deflationary spiral could lead to it yes, but that would mean massive printing without debt backing that printing for it to happen – OR, it can also come about because we have so much debt that people just lose confidence in our ability to ever repay. Either outcome is the same in the end, no one wants to hold your money. Right now, though, because everyone is trying to get out of DEBT, they NEED our money. Again, watch the 88.8 level on the dollar.

Bernanke, buddy, there’s something less than genuine about you… and listening to you talk, frankly, pisses me off.

Monday, June 7, 2010

Equity futures are higher this Monday (hence forth to be known as Wave2day). The Euro started off lower yesterday afternoon but has bounced back to very close to break even.

Below is a daily chart of the dollar on the left and Euro on the right. The dollar is now right up against a major resistance line in the 88 area. Note the small triangles that were broken on Friday, the minimum target on the break is well above the resistance line at about 89.5, so it would take a failure of that minimum target not to reach it. If you count that triangle as a pennant, it could be targeting as high as 94:

Now let’s take a look at a 10 year chart of the dollar to show you a resistance line that the dollar is currently up against. This is a pretty major junction, a break above that line would signal a major uptrend for the dollar and would likely be quite negative for equities:

On the other hand, below is a chart from etf-corner.com showing that the last two times the dollar reached this area a sustainable low in equities was put in:

I think it breaks above that area, but it may not do it right away. More evidence that dollar resistance will not hold is found in the currency P&F charts. Below is the dollar P&F that shows an adjusted target now of 114!

The action in the Euro has triggered a new target on the Euro P&F diagram that is well below parity, all the way down at 88! That is a very major move should that target be reached, but there is precidence as the Euro was in that same region in the 2001 - 2003 timeframe:

The Head & Shoulders pattern I’ve been showing has a weak right shoulder, so it could be that we still need a bounce higher to finish that up:

That H&S pattern is not very well formed on the right side, but it doesn’t have to be. And, as I look around at other indices, like the Transports, I see that it’s even less well formed which leads me to believe that we likely will not go all the way up to form a more perfect right shoulder. And the Elliott Wave count suggests that it’s most likely getting close to rock and roll time.

The economic data is light this week, we’ll get Consumer Credit this afternoon.

Officials from Hungary are trying to smooth over their prior talk of default now saying that they are not as bad off as Greece! Riiiiggght. Which version do you believe and do you have confidence? What you really need to be asking is WHEN they default, who is going to eat the loss? All of the sudden Germany doesn't look so strong relative to the PIIGS.

The same resistance and support levels are in play, SPX 1,070 is overhead while 1,040 is the neckline support area.

Friday’s powerful down stroke could easily be the beginning of wave 3 of 3 down… that makes any bounce today wave 2. Friday’s move had what I think may be a record amount of volume on the downside, coming in at 99.1%! That means that effectively ALL the players in the market were selling. How many players is that is the question! Is it effectively four? Ten? I don’t think it’s many.

I learned something from watching some old archive footage of Martin Armstrong this weekend. He did a study in the early 90’s looking at the number of stock holders of record versus the movement of the broad market. What he found was the opposite of what you may think to be true – that at market tops there were far fewer owners of stock – they consolidated into a few hands. And at bottoms there was broad ownership – far more owners than at tops. While I don’t have data regarding ownership, and the whole stock ownership trail has become completely convoluted today, my suspicion is that there are very few market participants and that in fact stocks are highly concentrated into just a few players hands. That is dangerous as the “Flash Crash” proved.

I’ve also been warning that the number of 90%+ volume moves is a warning sign. McHugh picked up on the same thing and this weekend proposed that the fact that we’ve had twelve (!) 90%+ day moves since mid-April is the same exact type of warning as a Hindenburg Omen.

First of all, let’s note that there just hasn’t been enough time to generate the necessary new lows and highs combined for a Hindenburg. But at the root of the Hindenburg is a divided market, one that has internal splits with some sectors that are unhealthy while others are being bid up. And now we’ve had eight 90% down days and four 90% up days. That is a split that is dangerous and those lopsided moves add credence to the theory that there are fewer participants than is required for a healthy market.

Get below 1,040 and it will be painfully obvious that our 14 month rally based upon government handouts and accounting fraud is over. Heck, we’ll just call it foreplay…

Sunday, June 6, 2010

What follows is Martin’s relatively short take on what occurred during the second half the Great Depression and why it is different this time. I believe he makes a lot of good and valid points, but I also believe his is flat out wrong on others.

First let’s go back to August 2009, and look at what he said about the DOW back then in his paper “Will the DOW Reach 30,000 by 2015?” This is where he said, “The main resistance area is 11,000 on the DOW. We need a monthly closing above that level to signal that the March 2009 low will hold. Otherwise, we should expect a retest of the lows or still even perhaps new lows going into 31.4 months down from the October 2007 high with a rally into the next target 2015.75 reaching 30,000+.”

The way I translate that is to mean that if we fail to produce a monthly close above 11k (we closed April at 11,008 – that was the peak and it has since failed – so I say resistance held), then we are likely to revisit the lows or break them, then hyperinflate into the year 2015. Okay, fine, I can buy that as a possibility and it does fit into my general thinking that we would experience another wave of deflation and that the reaction following would then likely produce inflation and that would eventually mandate a change in the structure of our money unless that change occurs first.

Now we have M3 collapsing, we are on the verge of countries defaulting (the same as wave C of the Great Depression), and we have a rush into the dollar and US debt instruments.

So, with that in the background, let’s take a look at Martin’s latest paper:

One of the areas that I disagree with Martin on is the importance of being on a gold standard then versus now. In fact, I believe that being on a gold standard had very little influence on the events and outcomes of the Great Depression. What was much more important was the fact that the Private Bankers had taken over control of the money creation power and despite a “gold standard” managed to produce one of the largest CREDIT bubbles in the history of man. Gold absolutely FAILED to keep the total quantity of money under control – the total being the amount of sovereign money (in this case backed by gold) versus the amount backed by debt (came into creation bearing interest as someone else’s obligation).

I think a very important piece of the credit bubble puzzle now is rooted in accounting fraud. Martin is right about this point, THE MARKET KNOWS. It knows that our major financial institutions are INSOLVENT – they have marked to fantasy, they have played the shell game, they have transferred unserviceable debts onto the public rolls making them insolvent in return. Wave A down did NOT clear the DEBT, it is still there! The market knows!

Mark to fantasy accounting was one of the major contributors to the credit bubble. In 2007 FASB changed the rules back to mark-to-market. The reality hit the financials and drug the entire equity market down. Price to earnings shot to all time extreme highs because of this accounting (reality). Then, pressure mounted as the equities collapsed to reinstate mark-to-fantasy, it was reinstated and now price to earning fell right back down to a falsely marked level, yet even with accounting fraud P/E levels are still far above historic norms.

The market knows – this P/E reading is FALSE, it is marked to fantasy, the debt is still there.

It's no more complex than understanding that the growth of debt outstripped the growth of income. This is the underlying cause of the shift in CONFIDENCE that Martin and so many others discuss in the markets. Confidence allows people to take on leverage (debt) and it grows until there is an event that shifts people’s confidence that the debt can be repaid, then markets correct. It is the underlying math that leads to angst and the lack of confidence. This is occurring now throughout the entire world, not just in the United States.

At this time ALL our money is CREDIT money. INTEREST is DEFLATIONARY! It is the attempt to create never ending growth to compensate for the deflationary pull of interest that creates stupidity like attempting to grow at 2% or more per year. It is this reaction to deflation that prompts other actions to create inflation! Those other actions include dumping Glass-Steagall, lowering reserve requirements so that the banks can fractionalize more money, allowing derivatives to create more leverage, allowing banks to mark derivatives to fantasy instead of to a real market price, etc. Those are the things that create inflation when your money is entirely comprised of DEBT.

If you don’t believe that interest is deflationary, let’s do a little mental experiment like I often do – isolate it, put it in a room, and then take it to one extreme and then the other… So, in this case we have 10 people in a room and each have $100 CREDIT dollars, or $1,000 dollars total in the room. They perform transactions between one another but because they are all in debt, they must pay interest to the bank that resides outside of the room – let’s say 3% of the money is paid to the bank each period. At the beginning you had $1,000, and at the end of the first period there was only $970. The supply of money went down, that is deflation! Again, it is the attempt to counter this deflation that produces imbalances.

Now, Martin later says this, “There is NO direct ratio of money supply to the rate of inflation. It is simply a matter of CONFIDENCE.” While it is true that it is not exactly direct, there is most definitely a correlation between the quantity of money and PRICE inflation. It is this correlation that enhances or destroys confidence.

This time in the room there are two people, a VERY bright and irritating light, and only one pair of sunglasses. If both people in the room possess only one dollar, then the MOST the glasses can be bought for is one dollar! However, if both people possess $100, then the glasses may be purchased for considerably more! It is the easy availability of money that gives them supposed confidence to pay more, and without the money it is mathematically impossible to pay more.

So, Martin goes onto say:

“In order to create a 1930’s style depression the United States would have to adopt the very advice the IMF is telling Greece that failed in the 1930s and will destroy the nation politically.

…By insisting that there be a balanced budget, the IMF is supporting the bond holders at the expense of the people.

…The reason why I do not believe there will be a Great Depression is because it would”

His response is cut off, but he is saying there will not be a Great Depression. Well, no two depressions are the same, but the parallels between then and now are stunning, and the greatest difference between then and now is not the gold standard, it is that per capita debt levels are still much higher now than then, and the credit bubble is much more global now than then!

Austerity is not a choice once income cannot support debt, it is brought to you. The only way to change that is to either clear out the debt or to change the system (and clear out the debt).

INCOME to DEBT – this is the key. So, the government took private sector debt and made it public. The math is impossible, sovereign countries have no bankruptcy procedure, they can either default or print (if able). People are now realizing that countries cannot repay and thus confidence is being lost. Money can be created, but as long as incomes cannot service debts, then balance cannot be restored. The proof of this is in the amount of “money” now held at the banks, but yet they can’t lend to consumers who are saturated with debt as their incomes cannot support even more. The same is now true for all western governments of the world. This is why we see the diminishing productivity of debt over time that has now entered a phase transition into less productivity for new debt entering the system, and it is why adding debt at this stage produces lower employment.

The psychology of wave C down is different than the psychology of wave A down. The government has attempted the bailouts, they failed because their actions were opposite those required to bring the math under control. That is what destroys confidence – and the cycle repeats, only this time is on a much higher order than the Great Depression of the 1930s.

If monetary change does not occur during this deflation wave and our reaction is to print without debt, then we will get hyperinflation later that will destroy any value remaining in our money as the quantity gets even further out of control. This could produce equity lower, then much higher. But for now, the total quantity of money is contracting.

The alternative to printing without debt is to print and use the money to directly pay down debt. That is an equity for debt swap, it can work to print money and keep the total quantity of credit and non-credit money under control. That would require many deliberate actions such as I’ve outlined in Freedom’s Vision. In the mean time history may not be repeating, but it is certainly rhyming except on a more grand and global scale.

Europe has now seen the loss of confidence, the Euro is sliding even faster in reaction to their bail out. We now have Geithner talking up more stimulus while Europe and the IMF are talking austerity. The dollar is strengthening because global deleveraging is occurring and the holders of debt must scramble to get dollars in order to pay down debt. The United States for now is continuing to finance our debt, but that WILL change and Geithner/Bernanke will learn the same lesson learned by the Europeans. Confidence is destroyed when the math is so obviously out of whack, make the math even worse and at some point they too will encounter a phase transition in confidence – I believe we are setting up for that now.

The bottom line is that Martin brings up valid points, but not all of his points carry validity and neither do his conclusions that he often plays in both directions. Hey, I don’t pretend to know the exact outcome, but I do know BS when I hear it. People who claim to know the exact outcome are immediately suspect and thus let’s take what knowledge we can and move very cautiously into the future. I still think that history shows those “other” events are coming. Our governments and bankers are losing control and they will do extraordinary things to attempt to remain in control.

Martin is right that ultimately it is the people who will win the day – they always do. Unfortunately, history also shows that between here and there will be much more pain. While money and governments are a construct of man, we are slow to change and we repeat mistakes as the pendulum swings. Two steps forward, one step back.